Answer to Question #244582 in Macroeconomics for Lalaland

Question

A country experiences a decrease in the price level and a rise in real output. What combination of the 

changes in aggregate demand and supply would generate this outcome?

A. A decrease in aggregate demand but no change in aggregate supply.

B. An increase in aggregate supply but no change in aggregate demand.

C. A decrease in aggregate supply.

D. An decrease in both aggregate demand and aggregate supply.

Answer 1

Solution:

The correct answer is B. An increase in aggregate supply but no change in aggregate demand.

 

An increase in aggregate supply due to high levels of productivity will shift the AS curve to the right. This is because with enhanced productivity, firms will be stimulated to produce more quantity of output at every price level. This rightward shift of aggregate supply curve with aggregate demand being constant will result in a greater level of output and a decrease in the price level.